shareholders at the gate? cross-country evidence on the

Shareholders at the Gate?

Cross-Country Evidence on the Role of

Institutional Investors in Mergers and Acquisitions

Pedro Matos

U.S.C.

Miguel Ferreira

ISCTE Lisbon

Massimo Massa

INSEAD

INTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS2. COUNTRY TESTS

In the news:

“$2 trillion of deals in 07, on track to smash the recordset in 06 when markets partied like it was 99.”

Takeover Boom:

“Rise in the share of mergers that are cross-border, to a record 46% in the four months to April.”

“Once-staid institutional shareholders are becoming more willing to entertain offers as they strive to increase returns.”

INTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS2. COUNTRY TESTS

IMF (2005): Institutional investors assets >$45 trillion ($20 trln in equities)

In the news:

Activist Investors: ”US: big institutions are (or support) activist investors”

. CalPERS, Relational Investors (Home Depot)

. Kirk Kerkovian (Chrysler, GM)

“Europe: “Shareholders at the gate”?”

. Hermes (UK), Fidelity (UK)

. TCIF and Atticus

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

Institutional Investors & Mergers in the news:

• The Economist (April 26, 07): “London-based TCIF set the ball rolling by calling for a break-up or sale of ABN.”

• Financial Times (June 11, 07):“Atticus thinks Barclays should abandon its bid for ABNand is prepared to state its views publicly. How come news that an activist investment manager with just 1% of Barclays Bank’s shares can push the share price up by an initial 3%?

• ABN AMRO:

“Research shows that mergers often fail to bring expected benefits: look no further than the break-up of DaimlerChrysler after nine unhappy years.”

• DAIMLER-CHRYSLER:

Role of FOREIGN INSTITUTIONS in the largest ever takeover ($ 180 bln):

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

. Target = MANNESMANN (DE)

-> Largest DAX-30 firm

-> Large INSTITUTIONAL ownership: all shareholders with >0.1% were institutions (except Hutchinson Whampoa, HK)

Source: Hopner and Jackson (2004)

. Acquirer = VODAFONE (UK)

-> Large FOREIGN investor presence = 60% (40% alone by UK and US)

Hypothesis 1: Institutions as Facilitators

Institutional investors can reduce the bargaining costs associated with takeover bids.

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

H.1.a: Countries with higher institutional ownership are associated with a higher frequency of M&A deals.

Transaction costs are higher for cross-border deals. Foreign institutions can build “bridges” between target and acquirer firms.

H.1.b: A larger presence of foreign institutional investors is associated with a higher likelihood of being targeted in a cross-border M&A deal, a higher likelihood of the deal being successful, and a higher likelihood that full control is being acquired in the deal.

Hypothesis 2: Institutions as Monitors

Institutional investors can be “activists” and monitor the companies in which they hold shares. So institutional ownership can substitute for the market for corporate control.

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

H.2.a: Countries with higher institutional ownership are associated with a lower frequency of M&A deals.

Foreign institutional investors can act as carriers of better governance, and decrease value-unlocking through takeovers.

H.2.b: A larger presence of foreign institutional investors is associated with a lower likelihood of being targeted in a cross-border M&A deal, a lower likelihood of the deal being successful, and a lower likelihood that full control is being acquired in the deal.

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

Countries with ↑ INSTITUTIONAL OWNERSHIP have ↑ M&A VOLUME

Fraction of Cross-border M&A VOLUME ↑ with higher FOREIGN INSTITUTIONAL OWNERSHIP

Country-level findings:

Individual M&A transaction findings:

Higher FOREIGN institutional in the TARGET and ACQURIER firm is positively associated with the likelihood of: i) bid being cross-border; ii) success of the deal, iii) and for “full control”

RETURNS TO INSTITUTIONS HOLGING BOTH TARGET AND ACQUIRER firms make higher returns in cross-border deals

-> “bridge-building” pays!

Previous Literature:

Role of institutional investors on global corporate governance.

Gillan and Starks (07): evidence of activism in US is mixed

M&As in the US:

Stulz et alt. (90) Ambrose and Megginson (92)

Gaspar, Massa and Matos (05), Chen, Harford and Li (06)

Matvos and Ostrovsky (06), Harford, Jenter and Li (07)

M&As internationally : role of Law & Finance

Rossi and Volpin (04)

Bris and Chabolis (06)

INTRODUCTION 1. DATA 2. COUNTRY TESTS 3. FIRM TESTS CONCLUSIONS

OUTLINE OF THE PRESENTATION

0. Introduction

1. Institutional Ownership Data

2. Country-Level Tests

3. Firm-Level Tests

Conclusions

1. DATA 2. COUNTRY TESTS 3. FIRM TESTSINTRODUCTION CONCLUSIONS

Empirical analysis over 2000-05 :

. Institutional equity holdings – dataset 1: FACTSET/LIONSHARES

. M&A deals worldwide – dataset 2: SDC PLATINUM

FACTSET/LIONSHARES

used in Ferreira & Matos (JFE, forthcoming) to study the role of Institutiona

Investors outside the US:

. Institutional money does not have single ‘color’ (US=Non-US)

. Firms with higher foreign or active institutional ownership have

higher valuations (Tobin Q) and operating performance

FACTSET/LIOSNHARES: equity holdings by institutional investors

. 27 countries, >5,000 institutions, >35,000 stocks

. $ 18 trillion (Dec-05)

. 38.5% of world market cap

. 49.9% of market float

ALL WORLD. $ 5.2 Trillion (Dec-05). 19.1% of market cap. 27.9% of market float

EXCLUDING U.S. FIRMS

1. DATA 2. COUNTRY TESTS 3. FIRM TESTSINTRODUCTION CONCLUSIONS

A detailed view: largest firms in FR and SE

Domestic / US / Non-US Foreign

Local shares / ADR receipts

Ind. Grey Ind. Grey

1. DATA 2. COUNTRY TESTS 3. FIRM TESTSINTRODUCTION CONCLUSIONS

An aggregate view: Top 5 institutions

… … … ……

1. DATA 2. COUNTRY TESTS 3. FIRM TESTSINTRODUCTION CONCLUSIONS

OUTLINE OF THE PRESENTATION

0. Introduction

1. Institutional Ownership Data

2. Country-Level Tests

3. Firm-Level Tests

Conclusions

. M&A events per country (SDC data)

. M&A volume = % targeted in M&A deals

. Cross-Border ratio (as % of all deals)

. Dataset 1: SDC M&A deals

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

. Universe of firms = WS/Datastream

. Dataset 2: FactSet/Lionshares institutional holdings

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

. Holdings by DOMESTIC and FOREIGN institutions

COUNTRY-LEVEL TEST 1:

[T.IV] : most investor protection and market development variables not significant - except Common_Law as in Rossi & Volpin(04)

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

COUNTRY-LEVEL TEST 2:

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

COUNTRY-PAIRS TEST 3:

CROSS_BORDER(i,j)= # of deals target country i, bidder from j

IO(i,j) = % of country i’s Market Cap held by institutions from j

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

2. COUNTRY TESTSINTRODUCTION 1. DATA 3. FIRM TESTS CONCLUSIONS

ROBUSTNESS CHECKS ON TESTS 1-3:

(1) 2SLS: instrumenting IO using % MSCI, % ADR, Trading Volume, Dividend Yield, Short-selling restrictions, Tax rates

(2) Excluding US + Extended Sample of Countries

(3) Dep variable = % of Value (not #) of companies in M&A deals

(4) Country-clustered std errors

(5) Tobit

OUTLINE OF THE PRESENTATION

0. Introduction

1. Institutional Ownership Data

2. Country-Level Tests

3. Firm-Level Tests

Conclusions

INTRODUCTION CONCLUSIONS3. FIRM TESTS2. COUNTRY TESTS1. DATA

Firm-Level Sample of M&A Deals:

TEST 1: FOREIGN BIDDER

INTRODUCTION CONCLUSIONS3. FIRM TESTS2. COUNTRY TESTS1. DATA

(1) (2) (3) (4) (5) (6) (7) (8)2SLS

Total institutional ownership target 0.0284(0.17)

Foreign institutional ownership target 1.1532 1.2230 2.3562 2.4538 2.3387 3.9988 16.8156(3.35) (3.45) (4.59) (4.75) (4.06) (3.35) (7.50)

Domestic institutional ownership target -0.3654 -0.4863 -0.3307 -0.9442 -2.0592(-1.83) (-1.82) (-1.16) (-2.50) (-2.21)

Size target 0.1034 0.0941 0.0981 0.0649 0.0730 0.0170 0.0830 -0.0643(6.31) (6.01) (6.02) (2.57) (2.80) (0.56) (1.89) (-1.50)

Book-to-market target -0.0504 -0.0518 -0.0669 -0.0586 -0.1634(-0.90) (-0.93) (-1.04) (-0.58) (-2.40)

Investment opportunities target 0.0066 0.0150 -0.0017 -0.4457 -0.1833(0.06) (0.14) (-0.01) (-1.53) (-1.31)

Stock return target 0.0515 0.0425 0.1735 0.2573 0.0626(0.65) (0.54) (1.94) (1.83) (0.63)

ROE target -0.0849 -0.0819 -0.0783 -0.2237 0.1626(-0.87) (-0.84) (-0.69) (-1.31) (1.10)

Leverage target -0.0452 -0.0373 0.0835 -0.7855 -0.0671(-0.19) (-0.16) (0.31) (-2.03) (-0.23)

Cash target 0.2727 0.2791 0.3734 -0.9914 0.2694(1.08) (1.11) (1.30) (-2.08) (0.82)

Foreign sales target 0.8315(4.54)

Closely held shares target -0.1305(-0.64)

Governance score target 0.0015(0.62)

Intra-industry M&A -0.0421 -0.0482 -0.0523 -0.0221 -0.0237 0.0648 -0.0743 -0.2252(-0.56) (-0.63) (-0.69) (-0.21) (-0.23) (0.57) (-0.43) (-1.75)

Year dummies Yes Yes Yes Yes Yes YesCountry dummies Yes Yes Yes Yes Yes YesIndustry dummies Yes Yes Yes Yes Yes YesObservations 2,588 2,588 2,588 1,408 1,408 1,144 471 1,319

Panel A: Target Explanatory Variables

INTRODUCTION CONCLUSIONS3. FIRM TESTS2. COUNTRY TESTS1. DATA

TEST 1 (alt):

. Prob(Cross-Border Deal)i = a + b Xi + c IOTARGET + d IOAQCUIROR + e

Total institutional ownership target 0.3966(1.63)

Foreign institutional ownership target 1.5264 1.4707 4.0148 4.1628 5.3236 5.2054 13.8549(2.79) (2.72) (3.13) (3.18) (2.89) (2.47) (6.64)

Domestic institutional ownership target 0.0513 -0.0309 0.4407 -0.0651 -0.7476(0.19) (-0.06) (0.85) (-0.10) (-1.47)

Total institutional ownership acquiror -0.2631(-1.42)

Foreign institutional ownership acquiror 1.7058 1.7511 1.9131 2.2892 3.2462 6.0853 3.0789(3.26) (3.32) (1.88) (2.29) (2.42) (3.04) (1.99)

Domestic institutional ownership acquiror -0.6774 -1.3984 -1.2656 -0.8570 -0.3951(-3.69) (-4.68) (-3.52) (-1.88) (-1.59)

Target controls Yes Yes Yes Yes Yes Yes Yes Yes

Acquiror_controls Yes Yes Yes Yes Yes Yes Yes Yes

Foreign sales acquiror 0.3061(0.68)

Closely held shares acquiror 0.2693(0.53)

Governance score acquiror -0.0043(-0.90)

Intra-industry M&A 0.1145 0.0564 0.0477 0.5036 0.4326 0.7105 -0.1396 -0.0015(1.13) (0.55) (0.46) (3.30) (2.79) (3.72) (-0.49) (-0.01)

Year dummies Yes Yes Yes Yes Yes YesCountry dummies Yes Yes Yes Yes Yes YesIndustry dummies Yes Yes Yes Yes Yes YesObservations 1,432 1,432 1,432 617 617 468 205 623

Panel B: Target and Acquiror Explanatory Variables

Other Tests:

. Prob(Deal Success) goes up with IO

. Prob(Full Shares Aqcuired) goes up with IO

. Deal Premium:

Returns earned by (foreign/common) investors holding stock of firms involved in ALL and CROSS-BORDER M&A Deals

INTRODUCTION CONCLUSIONS3. FIRM TESTS2. COUNTRY TESTS1. DATA

N Average N Average

All shareholders (Combined Premium) 654 1.96% 177 1.82%Foreign shareholders in Target & Premium 637 1.21% 176 1.90%Common shareholders in Target & Premium 408 1.69% 125 2.56%

All shareholders (Combined Premium) 655 3.80% 177 2.68%Foreign shareholders in Target & Premium 638 2.46% 176 3.23%Common shareholders in Target & Premium 408 3.76% 125 6.30%

Panel B: CAR [-63;+63 or delist]

All M&A Deals Cross-border M&A Deals

Panel A: CAR [-5;+5]

-> “bridge-building” is profitable !

-> Matvos and Ostrovsky (06) and Harford et al. (07))

OUTLINE OF THE PRESENTATION

0. Introduction

1. Institutional Ownership Data

2. Country-Level Tests

3. Firm-Level Tests

Conclusions

CONCLUSIONS1. DATA 2. COUNTRY TESTS 3. FIRM TESTSINTRODUCTION

Country Level findings:

Volume of M&A ↑ with higher IO

Cross-border M&As ↑ with foreign IO

Individual M&A transaction findings:

Prob(Foreign Takeover) ↑ if Foreign IO

Foreign IO +vely associated w/ returns

… IO driving force in financial integration of capital markets